Pricing is one of the most challenging decisions for any startup. One of the simplest ways of discovering customer willingness to pay is simply to ask them.
And while at first blush that might seem a reasonable and effective solution, it is prone to wild inaccuracy. Absolute pricing judgments are hard without reference points. For example:
- How much would you be willing to pay for a new iPhone?
It’s a very challenging question to answer in the abstract. It all depends on what the phone can do and what sacrifices I would have to make to be able to afford that phone. That calculus isn’t any different for smart phones, expense management software, or flash storage. Every pricing conversation is a game of trade-offs.
Instead of asking what a customer might pay for your product, an absolute pricing question, it’s more effective to ask a relative pricing question:
- Would you be willing to pay more for a new iPhone or a new Android HTC One?
- How much would you be willing to pay for a mobile CRM compared to a desktop CRM?
- If flash storage improves performance by 30%, how much more would you be willing to pay than a standard hard disk?
These comparative questions establish a point of reference for the customer and force them to make a relative value judgment by comparing a new product to an existing product where value and price are known. This is much more valuable data because the opinions will reflect more accurately the feedback you will receive in the market.
No decision is ever made in the abstract – there are always trade-offs because every customer’s resources are finite. Purchasing decisions are no exception. The hypothetical “how much would you pay for X?” question will always generate bad data because the decision is made in the abstract.
On the other hand, comparative pricing questions establish relative value between existing products. You will be able to quickly tell which products are more important and valuable. And in talking to your potential customers, you will better understand both the competitive solutions and the complementary solutions for your product.
Most importantly of all you’ll understand the pricing decision process for your customers. You may very well find different segments of customers have radically different decision-making processes and your products features and pricing should reflect those differences.
I use relative pricing questions in researching the market opportunities for startups and on the whole they shed much more insight into the customers’ viewpoint than absolute pricing questions. I hope you can use it in your pricing discovery processes and find it to be as effective as I have.
*Reposted from Tomasz’s personal blog, which you can read here.